Interest In Weibo Continues To Grow

Details

Written by Greg Sushinsky - December 3, 2012

China Business News reported last month that ecommerce company Alibaba Group was interested in buying a stake in Sina’s (Nasdaq: SINA) popular micro-blogging site, Weibo. While Alibaba declined to comment, sources for China Business News said that talks had reached “the final phase.” Other sources suggested that Alibaba was interested in a 15 percent to 20 percent stake in Weibo. The Alibaba Group owns Alibaba.com, which has a subscription and advertising business model for its business to business commerce platform. Alibaba also owns Taobao Marketplace, a consumer e-commerce website.

Sina Five Day Chart Source: CNNMoney.com

Weibo is the main micro-blogging site in China, which is something like Twitter but often tends to be used for more meaningful social expression and whose popularity has rapidly spread. According to Sina, Weibo has roughly 400 million users. Sina overall is an internet and ecommerce tech company with strong advertising sales and revenue. Though there are several large internet and tech companies, notably internet search giant Baidu (Nasdaq: BIDU) and other large players in the space such as Sohu (Nasdaq: SOHU), Sina has carved out an impressive niche in the social media space. Tencent’s WeChat, or Weixin in Chinese, its mobile messaging service, has roughly half as many users as Weibo.Weibo also has the cachet of leadership, of being the favored microblogging platform, if not the cutting edge place from which to deliver public messages. But Tencent has nearly $4 billion cash and can be a formidable competitor.

Sina’s Strengths

Sina, like most of the Chinese internet names, has seen its stock price fall in the last several months, due to the slowing of the Chinese economy and worry from the market on growth prospects for its advertising revenue. For its recently reported third quarter, however, Sina increased its revenue to $147.7million, a 17.7 percent increase. Total advertising revenue was up more than 19 percent to $120.6million. Fully diluted GAAP earnings rose to $9.9 million from a loss of $336.3 million in the previous year’s quarter.

Although a series of extraordinary items has affected its earnings, one of the concerns investors had was that Sina was heavily investing in its Weibo platform while the market wasn’t sure of how Sina was going to be able to monetize it. Sina’s CEO Charles Chao said in regard to the recent results, the company “ was pleased with the initial results of Weibo’s monetization.” He added that Weibo revenues doubled sequentially from the preceding quarter, and that Weibo is now sharing revenue with Weibo application developers. Although the market didn’t care for the upcoming fourth quarter guidance on Sina, as many analysts and investors still see China’s internet stocks as sluggish due to the potentially slow recovery in China’s economy, another view is that Weibo’s payoff in the future may be huge.

Enter Alibaba

Alibaba Group, which famously contended with Yahoo (Nasdaq: YHOO) for several years until it finally completed a buyback for $7.6 billion of half the 40 percent stake Yahoo had in Alibaba, is known for its dynamic and often controversial leader, Jack Ma (real name Ma Yun), as well as Alibaba’s aggressive pursuit of growth for its businesses. Alibaba Group, which is reportedly looking to go public, would be worth about $40 billion, according to estimates, and is already a heavyweight internet player. While Alibaba is known mostly for its ecommerce, it’s possible the stake in Weibo would give it another important growth space in the internet.

What About Sina?

There may be more developments behind the scenes either before or after anything happens with Weibo. Charles Chao, according to some China watchers, would prefer spin off Weibo or at least it might make more financial sense.Weibo would likely be a textbook hot IPO. While Sina’s total market cap is roughly $3 billion, suggested valuations for Weibo range from more than $1 billion to around $4 billion.Then again, some would question the fit between even a part of Weibo and Alibaba, whose internet emphasis is more on the ecommerce side, something more like the ordinary portion of Sina’s business. Then there are the rumors that China’s most dominant internet company, Baidu, which does like to buy things and has been eager to spread its wings far beyond search, might step up and buy not just Weibo, but also the idea might strike Baidu to pursue the whole thing, Weibo, Sina and all.

Regardless of what happens next, Weibo has entered that next phase of growing beyond a novel idea into a potential powerhouse, with a high monetization upside. Investors should watch eagerly.

These columns are informational with research and opinion and are not recommendations for or against buying or selling securities or specific securities or investments. The opinions are solely the author's, but the author assumes no liability or responsibility for readers' decisions or actions concerning any investments or any information or opinion derived from these columns. Consult your financial or investment advisor.